Leveraged Volatility Funds Get Biggest Inflows in a Year: Bloomberg

By Brendan Conway

Some of the market’s highest-octane trading vehicles are getting a fresh burst of cash.

More than $520 million has flowed this quarter into two heavily used exchange-traded products, the ProShares Ultra VIX Short-Term Futures ETF (UVXY) and VelocityShares Daily 2x VIX Short-Term ETN (TVIX), the biggest such flows in a year, report Bloomberg News’ Nikolaj Gammeltoft and Cecile Vannucci. The unleveraged tracker of this index, Barclays iPath S&P 500 Short-term VIX Futures ETN (VXX), has gotten even more fresh cash — $620 million, according to XTF data.

These leveraged volatility exchange-traded funds and notes currently being used to bet on a bigger burst of euro-zone turmoil than what’s emanating from Cyprus bring their share of tradeoffs, however. Chiefly: the failure of the crisis to play out means many investors are losing money quickly.

The Bloomberg story points up what happens to these products when no crisis erupts — their value plunges. “Mounting losses are the price owners pay for insurance against bigger equity declines, according to Dominic Salvino, a specialist on the CBOE floor for Group One Trading, the primary market maker for VIX options,” the story recounts. “You’re buying protection against bad things happening, and when bad things don’t happen and you lose your premium, then most people don’t complain,” Salvino said in a phone interview.

During 2013, the two leveraged versions of this index are down by about 63%, while the unleveraged one is off 36%.

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Anonymous wrote:

That means were going up. The games is fixed duh

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As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.